The Psychology of Trading

Psychology is often such an overlooked aspect of trading. New traders are always looking for a brilliant strategy that will make them a ton of money and never pause to ask what it really takes to be a successful trader.

I was never a big believer in all this psychology stuff myself before I started trading. I just didn’t see the point of analyzing human behavior. That all changed when I become a trader.

A failing psychology and a bad control of his impulses will inevitably lead the trader in the medium or long term to failure. He will end up being emotionally overwhelmed, his excitement in the Freudian sense will give way under the onslaught of his internal and external impulses and he will “tilt” under pressure, under his emotions, under his tension… ruining months or years of gains in a few minutes or hours.

The idea that automatic trading avoids this type of problem is also an aberration. Indeed, the trader who develops his algorithm thinking that it will protect him from his impulses only adds a screen, an additional filter, a tree that hides the forest. From the moment he touches his code, he reinjects his impulses, he doesn’t improve it, he only degrades it. For automatic trading to be really effective, the software would have to work freely, without the interventions or permanent “improvements” of the neurotic trader.

The real work of a trader is therefore to work on his psychology in order to succeed in channeling his emotions or at least find biases to keep them under control. To be a good trader, you simply have to know yourself, you just have to get back to basic wisdom. Trading is above all a personal experience, one of the most difficult adventures of our lives but also one of the most exciting. There are no pretenses in trading, by trading we discover what is inside us, the non-rational part, the impulsive being that is buried deep inside us.

Many traders, out of fear of what is inside them, refuse to see this fundamental part in trading, which represents 90% of the results. They take refuge in books, methods, trading algorithms, training… to take care, to not see the essential: whatever their system, their method, their indicator, their money management… all this is just a piece of cake as long as they do not accept this simple truth: a trader without a method that controls his impulses will make money, a trader with the best method in the world will lose money, inevitably, if he has not done the only work that is profitable in trading: working on oneself.

Numerous studies in behavioral psychology in the 80’s and 90’s all point in the same direction: you take 20 people, you give them extremely simple trading rules to follow, a 3-point checklist before making and validating a trade and you let them trade for a month. The experience has been repeated hundreds of times by dozens of American, English and Canadian universities and the results have always been the same: with an ultra-simple method that a 14-year-old child could apply, you will have the majority of people who will be ruined in a month or who will vegetate, a tiny minority who will make money. And yet, they have exactly the same trading conditions, the same trading plan, the same capital, the same broker… there is no difference except what is going on in their heads.

The key to success in many professional fields such as high-level sports or trading is self-control and working on oneself. To be a good trader, it is better to do psychoanalysis to solve your problems with money, with your ego… than to pretend to work on your charts. But this work is long and difficult, but it is also the most “profitable” in trading. That’s what scares many traders, finding out why they react like this when faced with pressure, why they can’t take their losses, why they are totally overwhelmed by their emotions, why they can’t be patient, why they are euphoric when they’ve made a good trade and why they make their entourage go through hell when they’ve lost? Why so many conflicting emotions, violence, joy, and despair in them? Why does trading bring all this out?

These are some of the questions that will naturally come up in front of traders. Either the trader will accept to look at himself in the mirror and start a long process that could last for years without knowing where it will lead him, fearing the unknown… or he will resist and take refuge in his methods and books… not to see reality in the face and start a new repetitive cycle towards failure.

Indeed, the majority of traders will flee, refusing to face these questions, psychological work is frightening. We can understand them. When they started trading, they didn’t imagine the doors that it would open in them… there is a kind of original lie: the marketing of the financial world tends to explain that trading is easy, simple… they naturally need new clients and we are in a society where the majority of the population wants immediate results without effort because we are in the culture of the leisure society and of de-responsibility. And in the end, they find themselves facing the biggest challenge of their existence, not to make money, but to understand the psychic mechanisms that make them work. Without this effort, no gain is possible. From time to time, the trader will be able to make one or two good moves, but he will end up losing what he has gained because one cannot lie to oneself, one cannot deny his impulses, they will always resurface and they will make the trader pay the bill at a high price.

Telling people that trading is difficult, that it’s a work over many years, that it’s not enough to be a good technician to earn money, is difficult to hear and write because you are opposed to the marketing of financial institutions and people’s own desires. And often a large part of the population prefers to be lied to, it reassures them, just look at the presidential elections. But by telling the “truth”, we oppose the dreams of many people, we frustrate them and we expose ourselves to their aggressiveness. It’s better to lie and caress the trader in the right way than to tell the truth: without a deep work on yourself, you will never make money in the stock market in the long run. 90% of trading is psychological, all methods, all indicators can make money, that’s not the problem. The problem is you… Work on yourself and then any method will work because you will be able to follow it without cracking psychologically, without being overwhelmed by your emotions or your ego…

As proof, if there was one more, technical analysts who make money on the stock market are extremely rare, if they made money on the stock market, they would be traders… I personally know a lot of “famous” analysts who can’t follow their own recommendations because they are so overwhelmed by their effects when they try to trade… They are catastrophic traders, some have had the honesty to say that they have never made a penny on the stock market.

If it’s been 5 years, 10 years, 20 years that you’ve been losing money on the stock market, balance your books, balance your methods and do the real work, go see a psychoanalyst, a clinical psychologist… Understand why you can’t respect your money management, why you can’t take your losses? Discover the hidden side of trading… Discover yourself… Stop this ordeal that condemns the trader in a repetitive cycle where he will gain some time to lose everything, then work again to discover a new miracle method, regain some time and lose everything again etc… In this repetition, the trader will find some psychological satisfaction, it will allow him to fight against the anguish of death because he will be reborn from his ashes like a phoenix but he will destroy little by little his self-esteem and that can have devastating effects in the long run.

But, some will try to understand and begin the hardest work of their lives, the one that will change them, that will soothe them. And then trading will no longer be a suffering with a few fleeting joys, but an activity like any other, a gain or a loss that does not create more emotions than that. Trading then becomes natural because the relationship with money has totally evolved, it is no longer suffering, it is no longer narcissistically charged. Too many traders identify with their results: they make money, they feel good, their ego is strengthened, they lose money and it’s the collapse, they are nothing anymore. You are not identified and identifiable with trading, break this infernal circle.

– Jacob